Government Deficits and Debt
Introduced| English | Meaning |
|---|---|
| budget deficit/ˈbʌdʒɪt ˈdefɪsɪt/ | The amount by which spending exceeds revenue over a given period. |
| budget surplus/ˈbʌdʒɪt ˈsɜːpləs/ | The amount by which revenue exceeds spending over a given period. |
| balanced budget/ˈbælənst ˈbʌdʒɪt/ | A budget in which government revenue equals government expenditure over the specified period. |
| national debt/ˈnæʃənl det/ | A *stock*: the total owed, built up from all past deficits minus surpluses. |
| government bonds/ˈɡʌvənmənt bɒndz/ | Debt securities through which a government borrows funds and promises payments according to their terms. |
| crowding out/ˈkraʊdɪŋ aʊt/ | A reduction in private spending or investment caused by increased government activity, often through higher interest rates. |
When a government spends more than it takes in
- Each year a government collects taxes and spends on programmes.
- If spending is above tax revenue, it runs a budget deficit 预算赤字.
- If revenue is above spending, it runs a budget surplus 预算盈余.
- Equal? A balanced budget 平衡预算.
A government runs a budget deficit when, in a year:
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Spending above revenue is a deficit; below is a surplus; equal is balanced.
The national ______ is the total owed, built up from all past deficits.
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Debt is the stock; the deficit is this year's flow into it.
To finance a deficit, a government usually:
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It borrows by selling bonds to investors.
A deficit is a flow; debt is a stock
- The deficit is a flow: the gap for one year.
- The national debt 国家债务 is a stock: the total owed, built up from all past deficits minus surpluses.
- Think of a bathtub: the deficit is water flowing in this year; the debt is the water already in the tub.
- To finance a deficit, the government sells government bonds 政府债券 (it borrows).
A deficit is a yearly flow; the national debt is the stock it adds to
Flow or stock?
The deficit is a flow (one year's gap); the debt is a stock (all past deficits added up). Each deficit adds to the debt; a surplus shrinks it.
The debt is 500 billion. This year the government runs a deficit of 20 billion. What is the new debt, in billions?
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New debt = old debt + deficit = 500 + 20 = 520.
A budget surplus adds to the national debt.
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False. With a surplus the government takes in more than it spends and can pay down debt. Deficits add to the debt.
How the debt grows
- Each year's deficit is added to the debt: $\text{new debt} = \text{old debt} + \text{this year's deficit}$.
- Worked idea. Debt is 500 (billion). This year's deficit is 20. New debt $= 500 + 20 = 520$.
- A surplus would instead shrink the debt.
- Economists watch the debt-to-GDP ratio, because a bigger economy can carry a bigger debt.
One risk of large government borrowing is that it can:
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Competing for loanable funds pushes rates up, squeezing private borrowers.
Why deficits and debt matter
- Borrowing competes with private borrowers for loanable funds, pushing up interest rates — crowding out 挤出效应 private investment (next lesson).
- Interest on the debt must be paid every year, using up future tax revenue.
- But deficits can be useful: in a recession, deficit-financed spending supports demand (expansionary fiscal policy).
- The concern is persistent deficits in normal times, not a one-off during a downturn.
A budget deficit is one year's shortfall (a flow); the national debt is all past deficits added up (a stock), financed by selling government bonds. Each deficit adds to the debt ($500 + 20 = 520$); a surplus shrinks it. Large persistent debt raises interest costs and can crowd out private investment.
Write from a new debt of 835
- The national debt is 800 billion. This year's deficit is 35 billion.
- Find the new debt.
The national debt is 800 billion and this year's budget deficit is 35 billion. What is the new debt, in billions?
800 plus 35 is 835.
What is the new debt?
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Old debt plus this year's deficit is 800 plus 35.